Retail investors allowed into building societies but not cocos

RETAIL investors will be allowed to buy building societies’ more complex capital instruments, but not those of banks, the Financial Conduct Authority (FCA) proposed in a consultation yesterday.

Banks’ contingent convertible bonds, known as cocos, begin as debt but convert either to equity or are completely wiped out if a bank’s capital buffer takes a hit.

The idea is to make investors take the hit from any crisis, supporting the bank rather than the taxpayer – but the FCA fears the bonds are too complicated for some retail investors to understand.

It had taken a similar view with building societies’ new core capital deferred shares (CCDS). But the FCA has changed its mind, because building societies have fewer other routes to the capital markets and their members may want to invest.

As a result, mutuals can market the instruments to some customers, within tight limits. For instance, no retail investor will be able to put more than five per cent of their investable funds into the CCDS.